Order against Dynamic Stock Broking (India) Pvt. Ltd

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) vide an ad interim ex-parte Order dated April 23, 2009 (hereinafter referred to as the Order) had inter alia prohibited Dynamic Stock Broking (India) Private Limited (hereinafter referred to as the stock broker) from entering into any fresh agreements with new clients, in its operations as stock broker, till further orders, as it was prima facie found to have contravened the Code of Conduct prescribed for stock brokers under Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992. Thereafter, the stock broker submitted its objections to the Order, vide letter dated May 1, 2009. Subsequently, the stock broker vide letter dated May 14, 2009 had sought to cancel and withdraw the aforesaid reply and stated that it would be submitting its revised submissions shortly. Thereafter, vide letter dated May 18, 2009, the stock broker filed its reply. Pursuant to the same, an opportunity of hearing was also afforded to the stock broker on July 26, 2009 when Mr. Ranjit Bhonsale and Ms. Poonam Gadkari, Advocates appeared on its behalf and made submissions.

2. I have considered the reply dated May 18, 2009 filed by the stock broker, the oral submissions made on its behalf during the hearing and other material available on record. The limited issue for consideration at this stage is whether based on the available material on record and after considering the submissions made by the stock broker, the directions issued by SEBI, vide the Order against it need to be continued, revoked or modified in any manner. The circumstances which led to the passing of the Order had been mentioned in detail therein. The investigation in the matter of PSTL, prima facie revealed the operation of a widely distributed network of persons/entities who had joined hands in breaching market integrity by manipulating the shares of PSTL, forging a letter purported to be issued by SEBI to Mr. P.S. Saminathan (promoter of PSTL), publicizing its contents and the manipulators taking benefit of the artificial price rise caused by the said letter and selling of their substantial stake in the market, to their advantage and to the detriment of the unsuspecting investors. There were other persons/entities who appeared to have played their role in various capacities such as publicizing the contents of the forged SEBI letter, routing funds through various layers, offloading substantial shares at an artificial inflated price on December 22, 2008 etc.

3. The preliminary findings revealed that Mr. Raju G. Shah had traded in the shares of PSTL through a stock broker, India Capital Markets Private Limited on two trading days, December 19 and 22, 2008 on the Bombay Stock Exchange Limited. The bank trail had revealed that Mr. Raju G. Shah had received Rs.5,00,000/- from Mr. Nigam Vinod Shah on November 4, 2008, and that Mr. Nigam Vinod Shah, in turn, had received the funds from Mr. Rajesh Jani, who is the director of the stock broker. The Order at paragraph 62, had also mentioned that Mr. Amol Kokane (in his account) had received credits of Rs. 5,25,000/-, Rs.2,75,000/-, Rs.15,00,000/- and Rs.12,00,000/- from Mr. Praful P. Vora of M/s. Viren Trading Agency, Mr. Hemal H. Gandhi HUF of Datapro, Mr. Nigam Vinod Shah and Mr. Janak H. Chitalia of M/s. J.H. Chitalia & Co., respectively on October 10, 2008. It was further observed that the aforesaid persons had in turn received credits of similar amounts in their accounts from Mr. Rajesh Jani, just immediately before the funds were transferred to Mr. Amol Kokane on October 10, 2008. It was also noted that an amount of Rs. 5,00,000/- transferred from Mr. Nigam Vinod Shah’s account to Mr. Raju Shah’s account on November 4, 2008, was received in the account of Mr. Nigam Vinod Shah prior to the said transfer from Mr. Rajesh Jani.

Though, Mr. Rajesh Jani had stated during the investigation that the said payments to Mr. Nigam Vinod Shah were the repayment of the loans taken from him during 2007-2008, the same was not supported by any loan agreement. Further, it was also suspicious as to how Mr. Nigam Vinod Shah, having disclosed an annual family income of only Rs.50,000/- in his Know Your Client (KYC) documents, could advance a loan of Rs.25,00,000/-. It was further noted during the preliminary investigation that Mr. Nitin Goradia’s client account with the stock broker reflected a debit balance of Rs.15,00,000/- since April 2008, which was not cleared. It further found that certain important details/information pertaining to Mr. Nigam Vinod Shah in his client registration form, as submitted to the stock broker, had been left blank. It was also found that in the forms pertaining to few other clients registered with the stock broker, certain crucial information had not been disclosed. Further, the stock broker had assigned eight client codes in the name of Mr. Sameer C. Sanghvi, another director of the stock broker.

4. The stock broker had submitted that there was no rule or law which prohibits or limits taking/repaying loans by an individual, a director of a company or otherwise, and that it cannot be faulted for merely having a director who had borrowed and repaid loans. The stock broker further submitted that it had not in any manner been a party to or contributed to the loan transactions of its director, Mr. Rajesh Jani. The stock broker further submitted that it was neither part of any inter-connected entities nor was aware of the existence of such a link. It further contended that it never aided or abetted any person in obtaining or repaying the loan. It also stated that SEBI has failed in circumscribing its role and that directing it not to enter into fresh agreements with new clients in its operations as a stock broker, till further orders, pending investigation and passing of final order, is a grave miscarriage of justice. With respect to paragraph 63 of the Order, the stock broker submitted that the dealings and financial transactions by and between Mr. Rajesh Jani and the other entities may have been carried out in his individual capacity and not in the capacity as its director or on behalf of the stock broker.

The stock broker further submitted that the transactions carried out by Mr. Rajesh Jani cannot and should not in any way jeopardize its rights in any manner and that it does not stand responsible for any acts of omissions or commissions, if any, by any of its directors in their individual capacities and that no adverse inference could be drawn against them for the same. As regards the uncleared debits in the account of Mr. Nitin Garodia maintained with it, the stock broker submitted that no adverse inference can be drawn on the same and further submitted that due to the delay in paying monies, shares were not released until payment was received from Mr. Nitin Garodia. With respect to the transfers from the account of Mr. Rajesh Jani to that of Mr. Nigam Vinod Shah and Mr. Janak H. Chitalia, the stock broker submitted that the same pertains to that of its director Mr. Rajesh Jani. As regards the fact that Mr. Nigam Vinod Shah had advanced Rs.25,00,000/- to Mr. Rajesh Jani when his family income was low and without a loan agreement, the stock broker submitted that it was not a party to any of the said transactions.

As regards the alleged linkages and transactions as mentioned in paragraph 64 of the Order, the stock broker submitted that it is not aware of or concerned with the same. It denied that it indulged in money laundering activities and further denied the existence of any nexus between itself and Mr. Nirmal Kotecha. As regards the allegation that crucial information regarding the clients of the stock broker were left blank in the KYC forms, the stock broker submitted that the client registration form of Mr. Nigam Vinod Shah not having some details as alleged, is a minor lapse and that the forms would have not been filled partly as information would have been awaited from those clients or due to oversight. The stock broker had further submitted that there are no allegations of any manipulation or fraudulent trades resulting out of the eight client codes assigned to Mr. Sameer C. Sanghvi and explained the allotment of the codes. The stock broker contended that the quantities traded by it were “very small” and that the “alleged small quantities of trades” have not resulted in any substantial gains for it.

It further contended that the 1,000 shares purchased on December 31, 2008 was not through Kotak Securities Limited, as stated in the Order, but was purchased in its account.

5. I have considered the submissions of the stock broker. The submission that the financial transactions were done by its director Mr. Rajesh Jani and that the stock broker had no role to play in his borrowing and repaying money, appears to be convincing on the face of it. However, it is observed that Mr. Rajesh Jani had financial dealings with Mr. Nigam Vinod Shah, who in turn had transferred money to entities alleged of having suspicious banking transactions and involved in the manipulation in the matter. It is also observed that the stock broker was accommodating Mr. Nitin Garodia by not requiring him to clear the dues in his account. Therefore, the aforesaid facts make it difficult for me to reconsider the directions issued against the stock broker, at this stage. Further, in the present case a large scale manipulation was perpetrated involving numerous entities/persons acting jointly. Further, the preliminary findings of the investigation in the matter has found that certain important details had been left blank in the client registration form of Mr. Nigam Vinod Shah, maintained by the stock broker.

The investigation has also found the KYC forms of certain other clients to be incomplete. The stock broker has sought to represent this major lapse as a very small error by stating that the relevant columns were left blank for the reason that information was awaited from the clients or was left blank due to oversight. The know your client details as sought in the KYC Forms/Client Registration Forms are very vital pieces of information regarding a client who trades in the securities market. The said requirements have been prescribed by SEBI in the interest of securities market and have their own importance. Stock brokers cannot by-pass the statutory requirements and start trading for clients with incomplete client registration forms. If any information was required to be furnished by the clients, the stock broker should have taken all possible steps to obtain the same from its clients at the earliest and should have completed the documentation and maintained completely filled up registration forms. A stock broker is not expected to be callously indifferent while enrolling a person/entity as his client.

For the aforesaid reasons, SEBI cannot trust such a stock broker to enrol new clients when it has incomplete information in the KYC forms for certain of its existing clientele. The same may put the securities market at risk in one way or the other. In such circumstances, I am of the considered view that the stock broker has not made out a case for reviewing the interim directions issued against it vide the Order, at present. Till such time the investigation in the matter is complete and the stock broker satisfies SEBI of its bonafides, the interim direction restraining the stock broker from entering into fresh agreements with new clients, in its operations as a stock broker, would continue till further orders. The submissions of the stock broker and the documents submitted by it, if any, shall be considered by the on-going investigation in the matter.

6. In view of the foregoing, I, in exercise of powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11, 11(4) and 11B thereof, hereby confirm the directions issued against Dynamic Stock Broking (India) Private Limited, vide the ex-parte interim Order dated April 23, 2009.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

PLACE: MUMBAI DATE: JULY 6, 2010